The Innovation Imperative: How CEOs Can Deliver the Type of Innovation They Seek

As 2009 comes to a close, it would be hard to imagine a more challenging year to be a CEO. We kicked off with a wonderfully comprehensive economic collapse, our first and second quarters were filled with sweeping lay-offs, and we spent the last half of the year scrapping to deliver a solid performance to keep our companies afloat.

And now, just as things seem to be leveling off, we’re being bombarded with calls for more. Business publications, analysts, conference speakers and academics are all passionately arguing against the status quo. “Now is the time to push”, cry the pundits. “Market share is yours for the taking.” “Innovate! Innovate! Innovate!”

While all of this may be true, there’s a lot of time being spent on “what” can be done and very little discussion of “how”.

This article takes a decidedly different approach. It’s meant to give you a roadmap to make the most of the moment, to set your company up for greatness and be in the best position to deliver results in the new decade.

The root causes of the calls for innovation run deeper than a simple desire for change. In fact, we’re witnessing a confluence of trends that have made the pressure to innovate greater than it’s ever been.

Change is the new constant.

We are living in a world that’s become obsessed with the new and different. Trends spread like brush fires; here one minute, gone the next. Consumers expect to get anything, from anywhere, almost always within 24 hours. And in an attempt to meet the voracious need for “the new”, Fortune 500 companies have accelerated the pace of change with ever-faster line extensions and new product/service introductions. All of these have created a dynamic where consumers have been conditioned to expect they’ll see something tomorrow that’s different – and quite possibly—better than what they have today. Within this context, innovation has gone from being a worthy ambition to a real necessity.

Consumers aren’t the only ones pushing companies for a constant stream of new ideas.

The meteoric rise of institutional investors, private equity groups and hedge funds has created an environment of unprecedented activist investment. Gone are the days when CEOs could chart a long-term course, and work in relative isolation to put the pieces in place necessary to achieve their vision. Today, they’re measured by quarterly performance by activist investors, boards and funds looking to turn quick profits.

For the past 10 years, most Fortune 500 companies have delivered consistent growth by focusing on the bottom line. They’ve adopted programs like Total Quality Management, outsourcing, and six-sigma which have worked brilliantly to increase the efficiency and profitability of their business; however, they’ve also created a two-prong problem that’s just starting to surface now.

First, there’s a natural limit on efficiency. Many CEOs have reached a point where they can’t squeeze any more blood from the stone and therefore can’t rely on the traditional approach to drive the type of growth Wall Street has come to expect. As a result, they’re starting to focus on the topline and working to figure out how they can create new ideas that will drive meaningful revenue growth.

Second, all of the work they’ve done to achieve perfect efficiency has created systems that are not set up for real innovation. They’ve filled their ranks with people who are much more comfortable and adept at execution than innovation. And they’ve calibrated the process in a manner that’s designed to deliver improvement on the traditional task rather than to incorporate a new task.

Herein lies the central issue: many CEOs don’t have the people hard-wired to come up with game changing ideas. And even if they could, the very nature of “game-changing” is incredibly dangerous because it could quite literally change the game. Said another way, innovations are unpredictable. Unpredictability is the enemy of process optimization. And therefore the very thing they need –creative, new thinking capable of generating catalytic revenue growth—carries an inherent risk of screwing up everything they’ve built.

So in essence, we have a situation where consumers crave innovation, stakeholders demand it and the systems we’ve created can’t deliver it. It’s little wonder that innovation now commands such a premium.

A recent study published by Bain & Company illustrates the potential benefits of making a bold move when the going gets tough.

Bain studied over 200 companies across categories and came to three conclusions worthy of consideration at this moment:

Twice as many companies made the leap from laggards to leaders during the last recession as during surrounding periods of economic calm.

More than a fifth of companies in the bottom quartile in their industries jumped to the top quartile during the last recession. Meanwhile, over a fifth of all “leadership companies” — those in the top quartile of financial performance in their industry — fell to the bottom quartile.

Of the firms that made major gains in revenue or profitability during the last recession, more than 70 percent sustained those gains through the next boom cycle. The corollary was also true: fewer than 30 percent of those that lost ground were able to regain their positions.

The question is how?

As we said at the outset, calls for change can be more of a nuisance than a help if they don’t offer advice on “how” to change. We believe there are four critical steps in implementing a truly successful innovation program:

Step One: Break out of business as usual

Whenever you’re setting out to change the game, define the outcome you want to achieve and then assess what must be true to get there. Working backwards ensures you stay focused on the big goal and becomes a useful filter as you’re defining the challenges and key success factors that actually matter. A great example of this came from NASA in 1961. When President Kennedy proclaimed that the US would be on the moon by the end of the decade, the lead scientist at NASA said something along the lines of “We know where the moon is, we know where the earth is, everything else is just details.” Genius.

When the goal is defined and you’ve committed your team to its own space race, challenge yourselves to go to your category last. Apply lessons from other categories that will achieve the goal you’ve established. If the outcome is clearly defined and you attack it as an outsider, many times you can free yourself from the natural gravitational pull of the current category and come up with some potent new solutions. As Gary Hamel said in his article “Innovation Now”:

“When most people think about the future, they typically take 98% of the industry orthodoxy as a given. That means that before they start, they’ve already limited their potential for innovation to about 2% of the available “space”. Orthodoxy is the enemy of renewal. The future gets created by heretics.”

Step Two: Focus on unlocking existing assets:

Transformational outcomes don’t require you to transform your business. Once you’ve defined the outcome you want to achieve, we advocate exploring new ways to leverage assets you already have. It’s an approach that can add speed, decrease costs and increase your ROI on R&D. And encouragingly, it’s proven to be quite effective. In fact, in the Bain & Company study mentioned earlier, they discovered that a staggering 9 out of every 10 companies that successfully renewed themselves found the solution in mining hidden assets.

Fahrenheit 212 has worked on two projects that illustrate the power of this approach:

Samsung:

Samsung catalyzed sales of its LCD panels by asking a simple question: “Why does a video wall have to be a screen on a wall? What if the screens were the wall?” This led to the development of the world’s first interlocking digital display wall. Mirroring the structure of Legos, Samsung ID’s “plug and play” system offered exhibitors a way to deliver maximum impact, minimum complexity and full reusability. It gave Samsung a significant competitive advantage, was recognized as a top innovation at CES and has created a fundamentally new line of business for the company – and yet, the transformational outcome was driven entirely by a technology they already had. So, how exactly was this outcome accomplished?

The first step was defining the commercial objective that Samsung needed to achieve – creating new markets capable of generating 600,000 screens per year at a screen size of 10 inches or bigger. Early in the innovation process, the tradeshow market was identified as a promising opportunity because the industry met three key criteria: 1) tradeshow exhibitors relied heavily on visual display, 2) suppliers were global in scale and were highly consolidated and 3) these suppliers demonstrated a high level of receptivity to innovation. Beyond tradeshows, the Samsung ID would also appeal to retailers, hotels and other lucrative display markets. By eliminating labor costs and complexity, Samsung ID’s value proposition could command a significant premium price, putting margin back into the LCD business.

Fonterra:

Fonterra, the largest dairy producer in New Zealand, engaged Fahrenheit 212 to help drive top-line growth as global demand for dairy was declining. The team surveyed Fonterra’s asset inventory and discovered an underleveraged technology that was collecting dust on the shelves of the R&D department. It was a clear, taste-neutral whey protein isolate that could be combined with soluable fiber to create a sensation of satiety. Putting Fonterra’s protein into water posed no technical issues. The challenge, however, was defining a consumer benefit. The team soon realized that with more and more consumers around the globe concerned with weight control, the protein could be used to eliminate hunger pangs. Suddenly, a milk company had a role to play outside their core capability – it could create a new beverage that would provide consumers with a new tool to bridge the hunger gap between meals. Enter “WH2OLE – the water that quenches your hunger”.

Step Three: Show the world a new reality

It’s critical that Fortune 500 companies constantly assess risk. However, the endemic desire to assess and mitigate risk frequently motivates people to look for fault rather than celebrate potential opportunity. It’s logical, it’s natural and it’s a smart business discipline. However, it’s not entirely helpful when it comes to innovation.

To break out of that cycle and help people suspend their disbelief, we believe it’s essential to show ideas as if they already existed in the world today. Specifically, force yourself to create a prototype. If you’re setting out to create a new type of cake, bake it. For water than quenches your hunger, mix it up to get the flavor profile you want, put it in a representative bottle and give it a name. Or in cases like the LCD wall, when it’s not cost effective to create a physical prototype, we develop a video prototype that shows the idea in the context we envision. By bringing the idea to life, we’ve found you can create internal momentum throughout your organization, generate enthusiasm amongst potential B2B partners and significantly increase the accuracy of the feedback because everyone is reacting to something tangible.

Step Four: Give people skin in the game

In 1999, Jim Collins wrote a brilliant piece in the Harvard Business Review entitled, “Turning Goals into Results: The Power of Catalytic Mechanisms.” In it he addressed the problem that many managers face within their organization: they have a big goal but lack the organizational focus and courage to achieve it. Collins offered catalytic mechanisms as a potential solution.

By his definition, a Catalytic Mechanism is “the crucial link between objectives and performance, [the] galvanizing device that translate lofty aspirations into concrete reality.”

His article provided some fantastically poignant examples that span a wide range of industries.

But for the purposes of this discussion, let’s break his central thesis down into a simple analogy: if you’re standing next to a lake and you have to catch a fish to eat, you will catch a fish.

Collins posits that this same philosophy can be applied to business problems simply by framing a firm’s most ambitious goals in this type of scenario:

Step One: Translate your objective (I would like to catch a fish) into an imperative (I will catch a fish)

Step Two: Give it real teeth (or I will die)

Step Three: Get to work (start fishing… with dynamite)

Although he didn’t apply the theory to innovation, it is directly transferable. Giving your team a material stake in an outcome will significantly increase your chances of succeeding.

Because when people need to eat, they will come up with brilliant ways to catch a fish.

Sometimes even without the dynamite.

Peter Maulik is chief operating officer of Fahrenheit 212, an innovation consultancy based in New York.